Accounting reviewer

• Accounting is a process of identifying, recording and communicating economic information that is useful in making economic decisions
• Essential elements of the definition:

  • Identifying accountable events that affect the assets, liabilities, equity, income or expenses of a business
  • Recorded on the books of accounts
  • Not recorded in the books of account are non-accountable events
• Examples of accountable events:

  • Sale of goods
  • Purchase of raw materials
  • Asset depreciation
  • Dividend payments to investors
• Transaction 1: The company hired an employee

  Transaction 2: The company pays P10,000 employees’ monthly salary
• Journalizing is the recording of identified accountable events

  Posting classifies the effects of the event on the “accounts”
• At the end of each accounting period, the accountant summarizes the information processed in the accounting system to produce meaningful reports
• Information processed in the accounting system is communicated to interested users through accounting reports, with the most common form being Financial Statements
• Accounting provides information about economic activities that is intended to be useful in making economic decisions
• Types of information provided by accounting:

  • Quantitative information expressed in numbers, quantities or units
  • Qualitative information expressed in words or descriptive form
  • Financial information expressed in money
• Accounting is a social science that has been systematically gathered, classified and organized, and a practical art that requires creative skills and judgment
• In an Accounting System, the inputs are the identified accountable events; the processes are recording, classifying and summarizing; the output is the accounting report communicated to users
• Bookkeeping:

  • Process of recording the accounts or transactions
  • Normally ends with the preparation of a trial balance
• Accounting covers the whole process of identifying, recording and communicating information to interested users
• Accounting is often referred to as the “language of business” because it is fundamental to the communication of financial information
• Two broad functions of Accounting in business:

  1. To provide non-owners of a business with information useful in making investment and credit decisions

  2. To provide business owners and managers with information useful in managing the business
• Management is a process of establishing common objectives, coordinating efforts towards those objectives, and efficiently and effectively utilizing available resources to achieve certain goals
• Major facets of a business:

  • Finance: how a business generates and manages its funds
  • Production: how goods are produced or services are rendered
  • Marketing: how goods or services are communicated to customers
• Functions of a Manager:

  1. Planning: mapping out how a business goal is to be achieved

  2. Organizing: organizing personnel and resources according to the plan

  3. Staffing: selecting, training and developing employees

  4. Directing: leading personnel to ensure responsibilities are met

  5. Controlling: monitoring results against goals and taking corrective actions
• Examples in which accounting is used in making management decisions:

  • Planning: Forecast of sales
  • Organizing: Do we have the ability to spend more on marketing activities?
  • Staffing: Do we need to employ additional personnel?
  • Directing: Are employees properly motivated to meet the business goal?
  • Controlling: Have we met our goal of increasing sales?
• Examples in which accounting is used in investment and credit decisions:

  • Investor: Shall I invest in this business?
  • Creditor: Shall I lend money to this business? Does it have the ability to pay me back?
• Brief history of accounting:

  • Accounting can be traced back to prehistoric times, with methods of record-keeping and accounting existing for over 10,000 years
  • Double entry records first came out in 1340 A.D. in Genoa
  • In 1494, the first systematic record-keeping dealing with the “double entry recording system” was formulated by Fra Luca Pacioli
• Financial accounting:

  • Focuses on general purpose financial statements
  • Statements cater to external users like investors, lenders, and creditors
  • Governed by Philippine Financial Reporting Standards (PFRSs)
• Management accounting:

  • Involves accumulation and communication of information for internal users
  • Includes management advisory services on accounting, finance, business policies, etc.
• Government accounting:

  • Focuses on accounting for the government and its instrumentalities
  • Emphasizes custody of public funds, purposes of funds, and accountability of individuals
• Auditing:

  • Involves inspection of entity's financial statements or business processes
  • Aims to ascertain correspondence with established criteria
• Tax accounting:

  • Involves preparation of tax returns and rendering tax advice
  • Determines tax consequences of proposed business endeavors
• Cost accounting:

  • Systematic recording and analysis of costs of materials, labor, and overhead
  • Incident to production of goods or rendering of services
• Accounting education:

  • Teaching accounting and related subjects in an organized learning environment
  • Facilitates acquisition of knowledge and skills in accounting branches
• Accounting research:

  • Involves careful analysis of economic events and variables
  • Helps understand impact on decisions in various accounting branches, economy, or market environment
• Forms of Business Organizations:

  • Sole or Single Proprietorship:
  • Owned by one individual
  • Simplest form of business organization
  • Registered with the Department of Trade and Industry (DTI)
  • Partnership:
  • Owned by two or more individuals
  • Partners divide earnings among themselves
  • Registered with the Securities and Exchange Commission (SEC)
  • Corporation:
  • Owned by more than one individual
  • Created by operation of law
  • Ownership represented by shares of stocks
  • Registered with the Securities and Exchange Commission (SEC)
  • Cooperative:
  • Owned by more than one individual
  • Formed in accordance with The Philippine Cooperative Code of 2008
  • Owners are called members
  • Registered with the Cooperative Development Authority (CDA)
• Advantages and Disadvantages of Different Forms of Business Organizations:

  • Sole Proprietorship:
  • Advantages:
  • Easier and less costly to form
  • Decision making is simple
  • Lower extent of government regulation and lower taxes
  • Disadvantages:
  • Personally liable for debts and obligations of the business
  • More difficult to raise capital
  • Partnership:
  • Advantages:
  • Better business decisions with multiple partners
  • Easier to form than a corporation
  • Disadvantages:
  • Making business decisions may lead to conflicts
  • Partners can be held liable for partnership debts
  • Corporation:
  • Advantages:
  • Limited liability
  • Unlimited life
  • Stockholders relieved from managerial responsibilities
  • Disadvantages:
  • Difficult and costly to form
  • Greater extent of government regulation and higher taxes
• Types of Business According to Activities:

  • Service Business:
  • Offers services as the main product
  • Examples: schools, hospitals, banks, etc.
  • Merchandising Business:
  • Buys and sells goods without changing their physical form
  • Examples: grocery stores, online stores, distribution and dealers
  • Manufacturing Business:
  • Buys raw materials and processes them into final products
  • Examples: car manufacturers, technology companies, food processing companies
• Hybrid Business:

  • Engages in more than one type of activity
  • Classified based on the activity most in line with the business' purpose
  • Example: a restaurant that cooks meals, sells drinks, and provides dining services
• Sole Proprietorship: Owned by one individual. Registered with the DTI. Partnership: Owned by more than one individual. Registered with the SEC Corporation: Owned by more than one individual. Registered with the SEC Cooperative: Owned by more than one individual. Registered with the CDA
• Advantages and Disadvantages of Different Types of Business:

  • Service Business:
  • Advantages:
  • Perceived as an expert in the chosen field
  • Business success depends on credibility
  • Disadvantages:
  • Direct involvement in providing service to customers
  • May suffer first from decline in demand during economic difficulties
  • Merchandising Business:
  • Advantages:
  • Much lower start-up capital compared to manufacturing
  • May take advantage of price fluctuations
  • Disadvantages:
  • Need to have a retail store in a strategic location
  • Keeping track of inventory is tedious
  • Manufacturing Business:
  • Advantages:
  • High growth potential
  • Self-satisfaction is high
  • Disadvantages:
  • High start-up capital
  • Reliance on raw materials
• Accounting Concepts and Principles (assumptions or postulates) are a set of logical ideas and procedures that guide the accountant in recording and communicating economic information
• These concepts and principles provide a general frame of reference for evaluating accounting practice and serve as a guide in developing new practices and procedures
• Basic Accounting Concepts:

  • Separate Entity Concept: Business is viewed as a separate person from its owner(s), only business transactions are recorded
  • Historical Cost Concept: Assets are initially recorded at their acquisition cost
• Basic Accounting Concepts:

  • Going Concern Assumption: Business is assumed to continue to exist indefinitely
  • Matching (or Association of cause and effect): Costs are recognized as assets and charged as expenses when related revenue is recognized
• Basic Accounting Concepts:

  • Accrual Basis of Accounting: Economic events are recorded when they occur, not when they affect cash
  • Prudence (or Conservatism): Accountant exercises caution in making accounting estimates under uncertainty